What Lies Ahead For NetApp’s Software, Entitlements & Maintenance Sales?

May 10th, 2016 by Trefis Team
-7.91%
Downside
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NTAP: NetApp logo
NTAP
NetApp

NetApp has witnessed meaningful growth in its software entitlements and maintenance revenue in the last few years, even as its core storage product revenues have suffered in the same period. Software entitlements and maintenance (SEM) includes product upgrades, bug fixes and patch releases for existing products on an ad hoc basis. The growth in NetApp’s product sales over the past few years is also reflected in the SEM division, as shown in the table below. A key point to note is that since it is a purely software division, its gross margin (over 95%) is significantly higher than the company-wide gross margin (60-65%).

NTAP_Sem1

On the other hand, NetApp’s unbundled storage software sales have gone down since 2011, owing to an increase in converged systems sales and an increasing proportion of in-built software associated with storage products. [1] As a result, the revenue generated via independent storage software sales has fallen drastically in the last few years as shown below.

NTAP_Sem2

This trend could continue over the next few years, as customers are likely to continue to purchase converged systems rather than independent software or hardware. [2] Correspondingly, storage software revenues are likely to fall while SEM revenues could continue to rise. With product sales unlikely to pick up significantly over the next couple of years, SEM revenue should continue to increase as a percentage of product sales in the near term, as shown below.

NTAP_Sem3

Have more questions about NetApp (NASDAQ:NTAP)? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for NetApp
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Notes:
  1. Top Five Hot Data Storage Trends, Data Center Knowledge, February 2014 [↩]
  2. Software-Defined Storage Must Address Enterprise Storage Systems and the Cloud, Tech Target, January 2015 [↩]